Towers Study: Pension Funding Level Lost 20% in
2002

A Towers Perrin study found the declines were a result
of diminishing assets and liability increases. With funding
levels comparatively low, Towers Perrin said a typical plan
sponsor would have to cope with increasing pension expenses
and required asset contributions.
Some companies may also see large additional liabilities
charged to their balance sheets at year-end 2002.

The particular effect for individual company plans,
however, may vary significantly. The effect depends on such
factors as:

initial funded position of the plan

interest sensitivity of benefit obligations

asset allocation and manager performance

use of long-duration fixed-income strategies

offsetting effects of other actuarial assumption
changes

use of asset smoothing approaches that defer asset
gains from prior years.

The Towers Perrin report,
Capital Market Update: Review of Year 2002 Results
for Pension Plans
, analyzes portfolio return, pension liability changes and
their combined impact on the funded status of Towers
Perrin’s benchmark pension plan.
It tracks the asset and liability performance of a model
benchmark pension plan with an investment portfolio
comprised of 60% equity and 40% fixed income.
This diversified asset allocation approximates the average
portfolio for the 300 large companies included in the
Towers Perrin Retirement Financial Management Benchmarking
Database.

During the period 1996 to 1999, the funded ratio for
Towers Perrin’s benchmark plan (based on projected benefit
obligations – PBO) grew from 85% to 131%.
In the subsequent three years, the benchmark plan’s funded
level dropped to 80% as of year-end 2002, the lowest level
since 1993.

During the most current three-year period, the benchmark
plan’s portfolio returned an average -4.4% return per year,
while the Moody’s Aa bond yield dropped by a cumulative
1.4%, from 7.9% down to 6.5%.
These results follow four exceptional years (1996 to 1999),
over which portfolio returns for the benchmark portfolio
averaged almost 15.7% annually while the Moody’s Aa yield
increased from 6.9% to 7.9%, the Towers Perrin report
said.

The Towers Perrin benchmark plan’s portfolio reported a
-9.0% return for 2002, following a -3.6% return for the
prior year.
A more conservative 40% equity portfolio reported a -3.1%
return for 2002, while a more aggressive 80% equity
portfolio reported a -14.7% return.